ICICI Bank: Is the glass half full or half empty?

Lower slippages a positive, but doesn't still indicate tapering of asset quality woes

There could be two interpretations of ICICI Bank’s September quarter (Q2) results. A cursory look may disappoint given the 34 per cent year-on-year(y-o-y) decline in net profit to Rs 2,058 crore. This fell reasonably short of estimates (Rs 2,570 crore according to a Bloomberg poll of analysts), despite net interest income growing by 8.7 per cent y-o-y to Rs 5,709 crore in Q2. But, the impact of profit on sale of stake in its life insurance subsidiary (Rs 5,682 crore) has reasonably puffed up the year-ago quarter’s results. While Q2 numbers are also elevated by Rs 2,012 crore from profit on sale of stake in its general insurance business, lower gains vis-à-vis the year-ago period make the overall numbers look weak.

On the bright side, provisioning costs have reduced by 36 per cent y-o-y, suggesting some cooling off in asset quality concerns.

Q2’s provisioning absorbs the full impact of provisioning requirements (Rs 651 crore) towards the first list of 12 bad loan accounts referred to the Insolvency and Bankruptcy Code (IBC). Even the overall operating parameters offer hope as the core performance has been on the back of stable net interest margin (an indicator of profitability) at 3.13 per cent, an improvement of 14 basis points y-o-y. Domestic advances, led by retail loans grew by six per cent y-o-y to Rs 4,82,780 crore. Interestingly, the share of retail assets to its overall book is at an all-time high of 54 per cent, a shade below HDFC Bank’s proportion at 55 per cent.

As for bad loans, fresh additions to non-performing assets (NPA) or slippages, was lower by 42 per cent y-o-y at Rs 4,674 crore in Q2; it was also lesser than Rs 4,976 crore in Q1FY18. There was also a marginal reduction in its watch list (accounts identified as problematic) to Rs 19,590 crore. Likewise, gross NPA ratio stabilised at 7.87 per cent, marginally lower than Q1’s 7.99 per cent, though it remains elevated compared to 6.12 per cent a year ago.
 

Yet, it may be too early to conclude that the asset quality woes are fast tapering for the bank. For one, the inspection by Reserve Bank of India (RBI) of the bank’s loan accounts is still underway. Hence, the impact of divergence in provisioning, if any, will be felt in the December quarter. Extrapolating the trend seen in most private sector banks, ICICI Bank may have some divergence to report going ahead.
 

Likewise, higher provisioning may be required for the second list of 18 accounts recently referred to IBC by the RBI. The bank has Rs 10,337 crore of exposure to loan accounts in the second list, of which, it has recognised only 31.5 per cent of the loan outstanding as NPA. “Additional provisioning will depend on resolution. That will become clear in December quarter,” MD & CEO Chanda Kochchar said. A rough calculation indicates an extra pain of about Rs 7,000 crore. With not much buffer available, additional loan losses may have to be at the cost of operating profit.
 

While the ICICI Bank’s results came after market hours, its American Depository Receipts were up eight per cent at the time of going to press. But, while Q2 results indicate some stability in asset quality, it may be premature to turn very optimistic on the bank.